Capital Markets and Commercial Real Estate

Transcription

1 Capital Markets and Commercial Real Estate Everett (Allen) Greer November 8, 2011 Charlotte, NC

2 Goals of Presentation Disclaimers Market Drivers Economy, Interest Rates Capital Market Trends - CMBS, REITs, CDS Financial Regulations (Dodd-Frank) Investment Banking Market Conditions (Sales Volume, Price PSF, Cap Rates) Outlook & Forecast 2

3 Disclaimers This presentation is being conducted by Everett Allen Greer of who is not affiliated with Bank of America Merrill Lynch and is solely responsible for the information presented in this program. 3

4 Market Drivers 4

5 Market Drivers Supply / Demand Not as bad as early 90 s Non-Res. Supply Growth was Very Limited Growth Most Demand ties to Jobs, which is tied to GDP Office FIRE Employment, Portion of Service Employment Retail Household Formations, Income Growth Industrial Manufacturing vs Distribution Multifamily Households Hotel Corporate Travel Office Employment Jobs & Retail Sales - Drive Supply & Demand!!! Financing Is the Most Important Fundamental Leverage, Rate, Term, Recourse 5

6 Interest & Inflation 6

7 Interest & Inflation 7

8 Economy Consumer Confidence & Sales 8

9 Economy Employment 9

10 Economy Consumer Side Consumer Confidence is Poor at 39.8 (10/25 Conf. Board) Unemployment Remains High 9.1% (Sept BLS) Potential Sovereign Defaults (PIGS) Liquidity, Leverage, Interest (for non-aaa Debt) Poor Retail Sales are OK, the Rest is near Flat Line Investment Banks Capital IQ and Deal Logic show LBO s /M&A on the rise Record Profits GS near 1,000 batting average every day since the Crisis Started IB s record profits cost of taxpayer 10

11 Real Estate Capital Markets 11

12 What is a MBS? Mortgage Backed Security Type of pass-through security Mortgages are securitized into a pool. Rights to the revenue from the mortgages are divided into many smaller pieces (tranches, strips, slices), each with differing priorities. Proceeds are distributed to investors based on the priority of their tranche. During , accounted for slightly less than 40% of all commercial real estate lending, and higher rate for residential. 12

13 MBS Outstanding s in U.S. - Dropping 13

14 CMBS Issuance 14

15 What Broke CMBS Yield Rates Rose Slide from 8/3/2007 Presentation 15

16 Interest What Broke - AAA vs BB Spreads Greer CMBS / CMBx Yield Rate TM Tranche Yield Suboord AAA 2.69% 29.76% AJ 3.56% 12.70% AA 5.18% 10.63% A 9.61% 8.00% BBB 27.28% 4.72% BBB % 3.68% BB % 2.69% Unrated % 0.00% Implied Overall Debt Yield Loan to Value Ratio Weight of Debt 70.24% 17.06% 2.07% 2.63% 3.28% 1.04% 0.99% 2.69% % Class-A Equity Yield Total Yield 29.00% Class-B Equity Yield Total Yield % Contribution to Total 1.89% 0.61% 0.11% 0.25% 0.89% 0.30% 1.01% 4.73% 9.79% 75.00% 14.59% 32.84% Notes: 1 The table is somewhat complicated, as evidenced by the numerous footnotes. Several conclusions can be drawn. 1) If the 'Implied Overall Debt Yield' is much greater than loan rates in the marketplace, the CMBS market CAN NOT recover because the required yields are too high to make debt affordable to borrowers. 2) When the spread between AAA and BB tranches is above 500 bps (now at 9,963 bps), the market can't recover because of risk aversion for lower-rated tranches. As a point of reference, January '07 AAA-BB CMBS spreads were around 65 bps. Lastly, the yields for each tranche provide tremendous insight into the required yields for each layer in the capital stack. 2 MarkitTM Data and Calculations based on close of 10/27. Swap (10Yr) as of 10/26. 3 Coupon and Price data were from MarkitTM for AAA Senior through BB bonds. MarkitTM data was used as part of the calculations by to determine Spreads. Subordination levels were from MarkitTM. 4 Profit / arbitrage opportunity for the issuer was ignored. 5 The yield spread for "unrated" classes were based on (BBByield minus BB yield) times 1.0, round to the nearest bp. Class-A property equity yield was assumed equal to the BBB- (last investment-grade piece) yield rounded to the nearest 100 bp. Class- B property equity yield was assumed equal to the BB yield, rounded to 100 bps. 16

17 Bubble Creation & Bursting - Causes Drivers Leading Up to Bubble Vicious Upward Cycle of Growth Created Buyer Greed Cheap Supply of Capital to Fund Loan Demand Unrealistic Growth & Profit Incentives Across Industry NSROs, Issuers, Originators Misaligned Incentives Drivers Causing Bubble to Burst Never Before Rise in Delinquency & Loss Rates Faith in Ratings Lost Risk went from Under-priced to Over-priced 17

18 What is a CDO? Collateralized Debt Obligation Type of pass-through security CDOs are securitized debt pools, similar to CMBS, but debts can be CMBS/CDO paper, car/boat/plane loans, credit cards, or virtually any type of debt obligation. Rights to the revenue from the obligations are divided into many smaller pieces (tranches, strips, slices), each with differing priorities. Proceeds are distributed to investors based on the priority of their tranche. Tough to gauge accurately, but most experts believe these have accounted for 5-10% of all commercial real estate lending the past few years. 18

19 What is REIT? Real Estate Investment Trust Type of Pass-through Security Effectively a corporation As long as 90% of taxable income passed is through to shareholders, there is no corporate tax. All earnings are single-taxed at shareholder level. Current Industry Issues: Definition of Assets, Max Debt Load, Yield Note: additional rules include: 95% of income must be from interest, dividends & property income Minimum 100 owners, 75% of assets in real estate, 75% of income from rents or interest no more than 20% ownership in other REITs, 5 owner rule on 50% of assets each ½ tax year (5/50) 19

20 REIT Market Capitalization 20

21 REIT Bond Issuance 21

22 What is CDS? Credit Default Swap A bilateral contract where two parties agree to trade the credit risk of a third-party. A protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a default or failure to pay. Once triggered, the seller either takes delivery of the collateral (eg bond, note) or pays the buyer the difference between the par value and recovery value of the bond (cash settlement). They resemble an insurance policy, as they can be used by debt owners to hedge against credit events. Warren Buffet called these Weapons of Mass Destruction...counterparty??? 22

23 Players in Simple CDS Business Issues Bonds Rating Agency Rates Bonds Side Bet 1 Side Bet 2 Bonds initially rated too poor for market, eg BB Gives loss forecast & amount required for AA rating Side Bet 3 Investment Bank issues CDS (aka Credit Enhances Debt) Enough to make BB = AA, if debtor fails, IB buys bonds Pension Fund Buys Bonds with CDS enhancement Thinks it s AA investment 23

24 Credit Default Swaps 24

25 Interest & Currency Swaps 25

26 Financial Regulations 26

27 Financial Regulations Dodd-Frank Wall Street Reform & Consumer Protection Act 16 Titles See Summary on Wikipedia 243 Rules to be created (reportedly 62% not done) 67 Studies required (most are not done) 22 New Periodic Reports Restructure of Regulators, elimination of OTS Financial Stability Oversight Council (New) Office of Financial Research (New) Keys for Commercial Real Estate: Rating Agency Reform Securitization Reform (nominal change due to QIB clawbacks) Derivatives minimal change thus far due to netting 27

28 Investment Banking 28

29 Investment Banking Change over Time Advise Companies, High Net Worth Organizations/Individuals Collect Fees on Products, and Services, 1-2% & 20% Profit Structure Deals (Structured Finance) Bonds, Stock, etc IPOs, Raise Equity, M&A Municipal Debt, CFDs, REITs, MBS, CMBS Creation and Sale of New Cash-Less Deals (aka Derivatives) Options, Calls, Puts, Covered, Naked Futures Indexes, Commodities (Oil, Metals, Grains, Animals, etc) Swaps Interest, Currency, Credit Default, Life/Longevity 29 Like Printing Money

30 Investment Banking Derivatives - Volker Derivatives can be used as a Hedge Oil Consumer buys Futures Contract to Lock in Price Holder of Stock Buys Put Contract as Insurance against Loss Borrower with Variable Rate Loan buys Interest Swap Buyer of Bonds buys CDS like Credit Insurance Corporation Buys Death Swap on Board of Directors What is the IB s Role? Are they Hedging an Existing Position or merely Placing a Bet Are they a Market Maker on the underlying instrument or derivative? If they sell two sides of a Swap, do they have risk? 30

31 Real Estate Markets 31

32 Commercial Real Estate Sales Volume 32

33 Commercial Real Estate Prices $$ PSF 33

34 Commercial Real Estate Cap Rates 34

35 Top - Bottom Market Stats as of 2011 Q2* INDUSTRIAL Q2 OFFICE Q2 RETAIL Q3 Vac Metro Vac % Eff Rent $ Vac Metro Vac % Eff Rent $ Vac Metro Vac % Eff Rent $ 1 Los Angeles 7.3% $ Honolulu 7.9% $ San Francisco 3.8% $ Salt Lake City 8.4% $ Albany 8.4% $ Fairfield County 4.5% $ San Francisco 10.1% $ New York 8.9% $ Northern New Jers 5.8% $ Houston 10.4% $ Pittsburgh 10.6% $ Long Island 5.9% $ Orange County 10.4% $ Long Island 11.9% $ San Jose 6.1% $ Portland 10.6% $ San Francisco 12.0% $ Los Angeles 6.2% $ Kansas City 10.7% $ Trenton 12.5% $ Oakland-East Bay 6.4% $ Long Island 11.2% $ Oklahoma City 12.7% $ Orange County 6.4% $ Minneapolis 11.5% $ Boston 13.1% $ Suburban Virginia 6.4% $ Seattle 11.6% $ Louisville 13.3% $ Boston 6.7% $ Charlotte 15.5% $ Charlotte 16.8% $ Charlotte 10.8% $ Hartford 17.2% $ West Palm Beach 20.4% $ Syracuse 14.5% $ Sacramento 17.7% $ Atlanta 21.1% $ Colorado Springs 14.7% $ Phoenix 18.1% $ Tampa 21.1% $ Cincinnati 14.9% $ Atlanta 18.2% $ Edison 21.3% $ Dallas 15.0% $ Boston 18.6% $ Dallas 22.1% $ Cleveland 15.1% $ Stamford 18.6% $ Riverside 22.5% $ Indianapolis 15.1% $ Detroit 19.1% $ Sacramento 23.0% $ Tulsa 15.5% $ Memphis 19.5% $ Phoenix 25.4% $ Birmingham 15.9% $ Trenton 21.6% $ Detroit 25.5% $ Columbus 16.1% $ Ann Arbor 23.4% $ Las Vegas 25.6% $ Dayton 17.1% $8.81 National Average 14.4% $5.08 National Average 16.8% $20.20 National Average 11.1% $15.82 Min 7.3% $2.32 Min 7.9% $14.34 Min 3.8% $8.81 Max 23.4% $8.13 Max 25.6% $55.26 Max 17.1% $31.80 Spread 16.1% $5.81 Spread 17.7% $40.92 Spread 13.3% $22.99 Source: CBRE Economic Advisors, Source: REIS, Source: CBRE Econometric Advisors (Q2), REIS, Inc. (Q3), 35

36 Charlotte Commercial R.E. as of 2011 Q2* INDUSTRIAL Q2 OFFICE Q2 RETAIL Q3 Submarket Vac % Ask Rent $ Vac Vac % Eff Rent $ Submarket Type Vac % Ask Rent $ Airport/West 12.2% $4.80 CBD 13.4% $23.42 North A 12.3% $12.04 Cabarrus County 29.3% $4.45 North N 11.8% $15.97 CBD 20.8% $4.15 East Charlotte 6.6% $10.49 East A 2.7% $9.30 East 10.3% $6.76 Midtown 15.9% $28.42 East N 12.8% $14.30 North 18.5% $4.57 North Charlotte 19.1% $18.94 South A 8.9% $15.03 Northeast 10.4% $4.21 South Charlotte 18.1% $18.91 South N 11.8% $22.72 Northwest 14.8% $3.17 Southeast Charlotte 19.6% $20.92 Gaston County A 16.3% $6.68 Southwest 16.3% $4.17 Southwest Charlotte 22.6% $10.52 Gaston County N 10.9% $12.41 Union County 12.2% $4.04 Subtotal: Suburban 18.9% $14.20 York County 12.2% $3.80 Source: CBRE Economic Advisors, Source: CBRE Econometric Advisors (Q2), REIS, Inc. (Q3), Source: REIS, 36

37 Outlook & Forecast 37

38 Greer s Recovery Signs Prereq s to Recovery CDS Exposure under $25 Trillion (i.e. under 50% of peak) Stable or Decline in CMBx Yield Spreads for 6 weeks Re-emergence of CMBS market New CMBS Market will include: Issuer Keeps 1-5% 1 st -loss piece AAA Subordination near 30%... AAA is 70%, not 90% of issue REIT Market Capitalization (Total Value) Stabilizes or Increases for 6 months Consumer Confidence Rises and Stays Above 70 for 6 months As of 10/25/11 (last report) index at 39.8 (1985=100) Risk Curve (AAA Sr. vs BB) flattens to under 500 bps. As of 11/8/11, CMBx spread stands nearly 100 pts (2.72 v ) or 9,963 bps 38

39 Greer s 3-Year Forecast as of 11/8/2011 Barbell Modest Growth or Global Recession Global Economy Heals or Not 60/20/20 Cap Rates will Rise % during Mostly in class B/C Trophy Class A will remain low until Flight to Quality Stops CMBS must return for Class B/C recovery New MBS Skin in the Game Deleverage for Loans AND MBS paper Individual Market Performance will continue to vary widely. Difference in Top vs Bottom Markets is Growing (3x+ vacancy) Change Creates Opportunities Build Businesses SBA will remain very Active Fed s Best tool 39

40 Quote of the Day prediction is very difficult, especially when it s about the future NY Yankees #8, Yogi Bera Niels Bohr Nobel Laureate, 1922 Atomic Structure / Quantum Mechanics 40

41 Questions / Answers 41